Florida Estate Planning

ESTATE TAX FILING FOR 2010 – DEADLINE EXTENDED

 

If your last name is “Steinbrenner,” or you also are the heir to the estate of a decedent who passed in 2010, then you likely know that your assets stand at a crossroads and that the estate executor has a huge choice: to file for the estate tax or not to file? That, is the question.

Formerly, the deadline was November 15, 2011, only a couple weeks out. Good news: Now, the deadline has been extended out to January 17, 2012.

So, why is there even a choice to file an estate tax return anyway and why might it be a difficult choice? It exists, as you may know, because last December’s budget compromise created an estate tax for the year in which there wasn’t any estate tax. The move was to offer a “retroactive” estate tax to cover up the hole Congress had previously left open by allowing the 2010 tax to lapse.

Of course, practically speaking anyway, it still doesn’t sound like a choice was created because, well, who would choose the estate tax? Indeed, there is a reason to choose the estate tax, but it depends entirely on the nature of the assets in the estate because of the “carryover basis” versus the “stepped-up basis” dilemma.

If you choose not to pay the estate tax, then it catches up to you in the form of capital gains taxes upon the eventual sale of those assets. This is because the IRS will use the “carryover basis” or the original cost of the assets when determining capital gains. Assets that have significantly appreciated, or assets for which you cannot prove an original value, can become liabilities if you also plan to sell them. On the other hand, if you chose to pay the tax (35% on assets in excess of $5 million) then the IRS will use the “stepped-up basis” or current market value when determining the capital gains tax owed.

More advice and information can be found in Deborah Jacobs’s recent article (as well as in an earlier New York Times piece), but so much depends on the particular assets and record-keeping abilities of the estate.

Bottom line: As with any estate tax planning, make sure you consult with competent legal counsel, especially well before the clock runs out on January 17, 2012. In such instances, it may be prudent to file the estate tax return since you won’t pay taxes, but the rest involve a difficult calculation.

You can learn more about estate taxes on the Estate Tax Practice Center on our website.

 

 

JOINT OWNERSHIP - HIDDEN PITFALLS TO AVOID

Estate planning can be daunting. Once you get past the fact that your very mortality (and morbidity) is the triggering event, estate planning means taking stock of all you own and, what is often more important, how you own it. Yes, there are many degrees of ownership and each can make for some difficult wrinkles.

One common phenomenon is joint ownership between generations. Not only is it common, but it can make for some unintended problems. Forbes recently ran a piece on some of these problems and the five reasons to avoid such ownership form. Let’s review some of the high points, but I would commend the full article to your reading file.

Joint ownership oftentimes is an attempt to simplify things, or at least that is why people use it as a means of holding title. Perhaps they want to simplify practical day-to-day financial management. Aging parents needing such help may add an adult child’s name to a bank account or investment, either for direct aid or for just assisting in managing the accounts or assets. Likewise, it could be done as an attempt to avoid probate. Adding the adult child’s name to the account, investment, or real estate as a form of will-substitute (a so-called “poor man’s will”). Of course, these are only simple solutions, and may actually work, when things go off without a hitch.

One problem to remember is joint-ownership is a two-way street. That means that adult child joint owner has equal ownership rights to the assets and so do any of that adult child’s financial predators. The adult child may have their own creditors, may be facing an acrimonious divorce, or may be sued for damages in civil court. In addition, while no parent would anticipate it, the adult child may use the jointly owned bank account for a “quick loan” when they are running a little short of cash. Any of these unintended consequences can not only jeopardize the financial independence of an aging parent, but can cause hard feeling among other adult children who may (or may not) be joint owners with their parent.

Another problem, especially from an estate planning perspective, is that joint ownership as a stop-gap or a will-substitute is not really estate planning and may run afoul of the parent’s actual estate distribution wishes. For example, the adult child who has joint ownership doesn’t have to share such assets upon the parent’s death. As you can imagine, it is very easy for such cases to spill over into family squabbles and even prolonged court-cases.

Sometimes joint ownership seems like a good idea and a quick fix to avoid probate. And, sometimes it is. Before you use joint ownership as a form of titling your assets, however, consider the drawbacks.

In the end, an estate planning attorney can help you determine whether joint ownership is appropriate under your unique circumstances. Remember: Look before you leap. The protection of your assets and family relationships are at stake.

You can learn more about Joint Ownership in the January issue of our free e-newsletter, “Joint Tenancy Troubles.” Visit our website and sign up to receive this valuable update for free every month.  

 

ELDER LAW / DEMENTIA

Do you have a loved one with dementia? If the statistics hold, many more of us will have loved ones with dementia in the future. Unfortunately, with workers (who still have employment) staying on the job well into retirement, that means we will have many co-workers with dementia, too. A recent story out of DeKalb County (i.e., Atlanta) illustrates this coming trend.

Meet Linda Carter, the Superior Court clerk of DeKalb County. At age 59, Linda suffers from early onset Alzheimer’s. Her condition was a secret held between Linda and a helpful confidant in the court office. This confidant helped Linda perform her duties and remain employed. Obviously, such an effort is not sustainable. Recently, their secret was revealed when Linda was offered a routine form to sign. In reality, the form was a letter of resignation prepared for her. She signed it.

Linda wants her job back. She sued the court to reinstate her post, once it became clear what had transpired. Now, a quagmire has developed as other employees have deemed her mentally unfit to return to her post.  

While this is a rather novel case (especially arising in the context of a courthouse), it is illustrative of a growing problem in the workplace – employees who have Alzheimer’s or dementia. Alzheimer’s patients oftentimes will go to great lengths to hide their condition. This, in turn, puts an undue burden on others to recognize and properly deal with the situation. After all, those afflicted with the impairment aren’t without rights and “reasonable accommodations” ought to be made.

As an employee, it’s important to know your abilities and how you are performing. Similarly, as a fellow employee it’s important to understand your co-workers and deal with the situation honestly. Regardless, these types of cases will only increase as statistics rarely lie.  

 

Why Have A “Crummey” Trust?

When you’re looking to pass on significant assets, a trust is a powerful tool. Quality is important. While a “crummy” trust won’t cut it, a “Crummey” trust just might do the trick. Poor puns like this and more abound in a recent Forbes article about “Crummey trusts” I thought you might enjoy.

A “Crummey trust” – so named for the case of Crummey v. Commissioner and the good Reverend Crummey himself – is a way of legally avoiding estate taxes while passing on wealth to heirs by combining an irrevocable trust and a life insurance policy. To create a Crummey Trust, you first create the trust and then have it buy a life insurance policy on your life. In the end, when you pass away, the beneficiaries of the trust inherit the proceeds from the life insurance policy without that money ever “coming in contact” with your taxable estate.

This strategy isn’t without its challenges, however. One challenge is the risk of incurring gift taxes. However, as long as annual premiums are below the gift tax threshold of $13,000 per person (and you don’t gift them anything else during the year in excess of that amount in combined gifts) you can stay in the clear.

The biggest problem usually tends to lie in the practice of sending out annual letters – “Crummey letters’ – since the beneficiaries must be notified within very specific windows during which they may elect to withdraw the gifted funds. Failure on the part of the trustee to send out the letters can raise questions with the IRS and may upset the apple cart, so to speak, when seeking to qualify the annual gifts as falling within the annual gift exclusion. For this reason, many families find the safest approach is to engage a professional trustee to handle these notice letters and other administrative duties to ensure compliance.

 

QTIPs: May Cause Problems Unrelated To Your Ears

Blended families are a fairly normal part of modern life, with both divorces and remarriages becoming quite common. That said, this fact of life accounts for a good portion of the family baggage of modern living and a lion’s share of the estate planning problems. Blended families have some extra concerns and extra problems, especially when each spouse hopes to take care of their own children from a previous marriage. A recent Forbes article explores a particularly strange probate case to prove the point.

Word to the wise: Watch out for QTIPs (and not just because your doctor is worried you will hurt your ear). A QTIP is shorthand for “Qualified Terminable Interest Property.” It is a way to hold property for the surviving spouse that qualifies for the unlimited marital deduction without being an outright bequest.

Of course, a spouse can always give his or her assets outright to their surviving spouse without incurring taxation. In the case of an outright bequest the surviving spouse gets to deal with the outright assets as his or her own property (because it is). But what if you ultimately wanted to give the property to your children from a previous marriage, but you wanted to allow your spouse to have it until their own death? That’s the planning strategy that lead to the contested probate court case of In the Matter of The Estate of Sydney Stark, as described by Forbes.

Sydney Stark used the QTIP to leave an apartment to his wife, Sylvia, and then ultimately to his children from a previous marriage. The problem with the QTIP is that the assets in the QTIP have to count as being owned within the surviving spouse’s estate to qualify for the marital deduction. As a result, it becomes more likely that the surviving spouse’s estate may incur the estate tax. Sylvia Stark’s estate did.

In the case of a blended family like this one, with Sylvia leaving her assets to her own child of a previous marriage, this strategy meant Sylvia left an estate tax bill to her own child without the additional assets to pay the IRS. Why? The QTIP assets passed fully to the children of Sydney Stark. Naturally, Sylvia’s own child cried foul.

You can read more about QTIPs and the unfortunate tale of this dystopian Brady Bunch in the original article. In the end, this case provides yet another lesson about matters for careful consideration when planning your estate, especially if you and your spouse have complex and potentially competing interests. 

 

 

The Joys Of Giving (Privately Or Publically?)

The recent passing of Steve Jobs has, for many admirers, raised anew the question of anonymous giving: is it better to give without taking credit? As a recent Reuter’s article points out, whether for Jobs or for the average donor, there are some important considerations to bear in mind.

Jobs was famous for a great many accomplishments, not the least of which was being a self-made entrepreneur who transformed a garage-sized company into a titanic icon. As a result, he was a powerful force in business and popular culture alike. He also is famous for not being a charitable giver, quite unlike his Microsoft foil, Bill Gates. However, that raises the very real possibility that he did give to charity, perhaps in death, if not also in life… but he did so in secret. Indeed, it wouldn’t have been terribly hard, especially for one who has proven himself to be a private person. But why would Jobs (or you) elect to give anonymously?

There are multiple sentiments supporting “quiet” giving. Whether you are bashful and wish to avoid undue accolades, or you simply want to avoid further solicitation, privacy is of considerable importance to many donors. Another basis supporting anonymous giving is religious tradition, as evident in traditions as disparate as Judaism and Buddhism. In the end, giving without recognition and fanfare holds an undeniably powerful pull and is the right choice for many.

Nevertheless, there remains at least one consideration favoring the public giver, as pointed out in the article. Although giving privately provides an opportunity to do good in the world, giving publicly provides an opportunity for others to witness good being done in the world. In short, it provides a generous role model to the world.

Either way, private or public, it’s clear that thinking about how to give can be as important as thinking about to whom. Whether Jobs gave privately is his own business. If he gave privately it’s because he wanted it that way. The question remains, however, how do you want to give?

 

Gift Tax Return Gotcha

Surprise. It’s a big year for the IRS and they’ve been opening many new fronts in the drive to assert tax law compliance. One of the largest and most unique fronts the IRS has opened has been a far-reaching gift tax audit on real estate transfers. As a recent Forbes article reports, the battle is tough going for the IRS, too.

The IRS estimates that somewhere between 60% and 90% of taxpayers will fail to file a gift tax return, despite having engaged in activity that requires a filing. As a result, it’s clear this is neither a petty problem in the Service’s eyes nor is it merely chump change waiting to be claimed. The problem with enforcing the gift tax has been the inability to catch someone in the act.

Never fear, the IRS has found just the right tool in the form of land records maintained at the state and local levels. Why? These public records allow the IRS to independently track the movement of properties between persons that haven’t shown up in gift tax returns. Family homes are just the sort of thing to pass easily between family members. However, things are rarely that easy when the IRS gets involved and that is just what’s happening now.

The lesson to be learned, regardless whether you have transferred any land in the past, is to be aware and diligent. While there are many ways and means to accomplishing your wealth transfer goals, you have to use the right tools.

Alternatively, those taxpayers who have transferred property without due diligence to the IRS’s gift taxes (and anyone following this story) have a grand development to watch. The IRS needs the states’ compliance to make their plan work and, while this has meant a great deal of cooperation in much of the country, it has met with resistance in California. There the courts have bristled at the IRS’s attempts to demand records. Forbes has a story to tell in the original article and the question remains: Will State courts further mire the IRS’s great gift tax audit effort?

 

CHARITABLE GIVING / QCD’S

You may have read about Qualified Charitable Distributions (QCDs) that can be made directly from your IRA. QCDs have gotten a lot of press this year as a tax-savvy strategy to support your favorite charity -- an opportunity that will expire at the end of this year unless Congress acts (and we’ve all seen how swiftly they act) to lock in the benefit.

If you have reached age 70-½ you have to begin taking required minimum distributions from your qualified retirement accounts. Some people don’t really want – or need – these taxable distributions. Well, you can’t get around taking them (thus the name “required minimum distributions”), but if you are charitably-inclined, you can get around paying the tax.  Your QCD can satisfy your distribution requirement, but there is no tax if the distribution is made directly to an IRS-approved charity. The gift also works to help reduce the size of your taxable estate.

There are a few important caveats. As outlined in a recent Smart Money article, your QCD must meet all of the following tax-law requirements:

1. It must be distributed from your retirement account, and you must be at least age 70-1/2 to use this strategy.
2. The distribution must be made directly by the IRA trustee to the IRS-approved charity. If the distribution check is made out to you personally, it will not qualify.
3. You cannot receive any benefits that would be subtracted from the donation – it must meet the normal tax-law requirements for a 100 percent deductible donation. This means you can’t receive anything in return for your donation, such as tickets to events, etc.
4. Your distribution must be otherwise taxable.
5. There is a $100,000 limit on total QCDs for any individual. If you are married and both you and your spouse have IRAs, then each of you is entitled to a separate $100,000 limit, for a combined total of $200,000.

Once again, the current tax laws that allow for QCD’s are only guaranteed until the end of this year. If this is a strategy that appeals to you, be sure to get qualified professional advice before making any gift of retirement assets.   

Reference: SmartMoney (July 20, 2011) “Making Charitable Donations from Your IRA”

 

Tax-Smart Giving

As many have written, 2011 and 2012 just might be great years for gifting, but that doesn’t mean there aren’t fundamentals worth considering, as Benny Kass points out in a recent piece for the Chicago Tribune about gifting property.

You likely know that property transfers can be made as outright gifts while you are living or post-mortem after your death. One of the key considerations is the tax consequences.

Lifetime gifting raises the issue of “tax basis,” since "the tax basis of the giver of the property (the giftor) becomes the tax basis of the recipient of the gift (the giftee)." If the property has significantly appreciated in value (and, yes, even in this economy some real estate has appreciated greatly), the recipient receives the same tax basis as the giver. For example, a $100,000 home that has appreciated to $500,000 at the time of its gift still has only a $100,000 tax basis. Further, if the recipient doesn’t own and live in that home for two of the following five years before selling it, then this tax basis will make the ensuing profit from sale a prime target for capital gains upon and other taxes (i.e., the difference between the tax basis and sale price in this example).

It’s a tricky arithmetic.

If the recipient is going to turn around and sell appreciated property, then simply gifting a capital gains tax bill might not be efficient. Perhaps other transfer options might make more sense.

Regardless, if you decide to gift, remember to file a gift tax return. Should you wish to take a “belt and suspenders approach,” you may want to file a gift tax return even if you aren’t likely to incur gift taxes upon the transfer. As the Chicago Tribune article points out, the IRS is in the middle of a campaign to uncover unreported but taxable gifts… by looking specifically at real estate transfers. 

Reference: Chicago Tribune (July 29, 2011) “Giving property as a gift requires careful tax planning”

 

IRS Issues Estate Tax Guidance...For 2010 Decedent's Estates

After a bit of biding our time, we finally have something official with which to work regarding 2010 estate taxes. Nevertheless, there is a bit more waiting to do. The IRS recently published its guidance in the form of Notice 2011-66 and Revenue Procedure 2011-41.

As you may recall, 2010 was a uniquely advantageous year for decedent’s estates. Yet, in many ways, it was a uniquely stressful year for estate tax planning. Most of the wealth transfer taxes lapsed after the inaction of Congress the previous year, until last December’s tax compromise that is. This compromise set the transfer taxes back in place, retroactively for the entire past year (i.e., 2010). With taxes both in effect and not in effect by various laws, the December compromise left it to individuals taxpayers to decide between paying estate taxes or not paying estate taxes. Consequently, much of the chatter on the issue has been debating which path to take (since it’s not actually as obvious as one would think). Now, resolving that tax dilemma is less hypothetical since Notice 2011-66 explains how to opt out of the estate tax and Revenue Procedure 2011-41 explains the special tax rules that will go into effect if you do opt out.

Hani Sarji has offered up a helpful piece on his Forbes-based blog explaining the developments in detail, along with the pros and cons. He also provides several helpful tables of information to help you navigate this issue.